Investment Banking Interview Questions And Answers

Updated 16 April 2023

Investment banking mostly deals with creating capital and minimising financial risk for other companies. Questions in an investment banking interview would vary depending on the level of expertise required by the specific position you have applied for. Getting an idea of the potential questions your interviewer may ask helps you prepare better for the interview. In this article, we discuss some popular investment banking interview questions you are most likely to face, along with relevant tips and sample answers.

Related: Asset Management Vs. Investment Banking: Differences

Investment Banking Interview Questions And Answers

If you are applying for an entry-level position in investment banking, here are some basic investment banking interview questions you can expect from the interviewer:

What are the three essential financial statements in investment banking?

Every investment banking professional is required to have an understanding of important financial statements. If you are lucky enough to get this simple question, briefly explain about balance sheet, income statement and cash flow statement along with their significance.

Example: ‘Balance sheet, income statement and cash flow statement are the three essential financial statements in investment banking. A balance sheet provides the list of a company's assets, such as land and building, plant and machinery, inventory and cash on one side and liabilities, such as equity, debentures and loans on the other. An income statement shows a company's profits or losses in a given accounting period. A cash flow statement depicts the net inflow of cash from operations and investing and financing activities.'

Which side of a balance sheet is equity listed?

Explain both formats of balance sheet - the account format and the report format - to the interviewer. Then, explain where you find equity listed in each of these formats. This would show that you have a clear understanding of balance sheet.

Example: ‘A balance sheet can be prepared either in an account format or in a report format. In account format, assets go on the debit or left side of the balance sheet and liabilities on the credit or right side. Since equity is a liability, it is listed on the right side of the balance sheet. In report format, assets are listed at the top and equity and liabilities at the bottom.'

Related: How To Read A Balance Sheet (Components And Template)

Does equity cost less than debt to a company?

Explain the cost implications of debt and equity to a company. Consider including the impact of income tax in either case.

Example: ‘A company pays interest on debt and dividend on equity. While a company incurs fixed cost on debt and borrowings, it only shares a portion of its income with the equity investors. But, interest paid on debt is deductible in income tax, whereas dividend is paid from income remaining after paying taxes. Thus, equity may not always cost less than debt.'

As an investment banker, how would you value a company?

This question requires you to have a good understanding of valuation techniques. The interviewer would expect you to talk about intrinsic and relative valuation methods and their effectiveness in valuing a company.

Example: ‘You can value a company using either intrinsic valuation method or relative valuation method. The intrinsic or discounted cash flow (DCF) value is the net present value of all the free cash flows during the lifetime of the company. Relative valuation compares a company's value with that of its competitors or the industry average. For example, P/E or price-to-earnings ratio helps compare a company's earning potential with that of its competitors or against the average P/E ratio of the industry.'

Related: What Does an Investment Banker Do? (Skills and Careers)

What are the common multiples used in valuing a company?

Mention some other ratios in addition to P/E that are used in determining a company's worth in relation to its peers.

Example: ‘P/E is the most common multiple used in valuing a company. It calculates a stock's price as a multiple of its earnings per share (EPS). Some other common multiples used for valuation include EV/EBITDA (enterprise value to earnings before interest, tax, dividend and amortisation), P/BV (price to book value) and EV/EBIT (enterprise value to earnings before interest and tax).'

Related: A Guide to Banking Operations (With Careers and Salaries)

Investment Banking Interview - Advanced Level Questions And Answers

If you are applying for a senior-level position, the interviewer would expect you to have an advanced understanding of investment banking concepts. Here are some sample questions the interviewer may ask:

How do you calculate beta for a company?

Beta measures the price volatility of a stock in relation to the benchmark index. Explain the various factors you would consider while computing the beta of a company's stock.

Example: ‘We can calculate beta by dividing the covariance of a stock's return by the variance of the index return over a given period. Covariance measures the return of a company's stock in relation to the market's return. Variance measures the market movement with relation to its mean.'

Related: Top Investment Banking Skills With Tips To Develop Them

How do you value a company that has historical negative cash flow?

This question tries to see how you would apply your knowledge in a real-life situation. Explain how the multiples method cannot be used for valuation in such cases and what alternative you would use.

Example: ‘Due to negative profitability, we cannot use most of the multiple ratios in valuing such a company. The most appropriate way would be to use the DCF, i.e., estimate the amount of free cash flow the company would generate in the future and compute its net present value.'

What is the most appropriate numerator for a revenue multiple?

The interviewer may ask this question to assess whether you understand the meaning of enterprise value and its relevance in computing revenue multiple. Briefly explain about the enterprise value to revenue (EV/R) multiple in your answer.

Example: ‘Enterprise value is the most appropriate numerator for a revenue multiple. We get enterprise value by adding net debt to equity value. Since revenue measures pre-debt profitability of a company, a revenue multiple uses EV as numerator instead of equity.'

When a company issues a debt instrument to finance its share buy-back, how does it impact the company's EPS?

In addition to evaluating your understanding of earnings and EPS, this question also intends to test your risk management skills. Toward the end of your answer, explain how it results in over-leveraging, which can be risky in the long run.

Example: ‘When a company buys back shares, the number of outstanding shares reduces, which in turn, increases the EPS. But, because of the debt issued to buy back shares, the interest expenses increase, bringing down the EPS. The net impact on the company's EPS would depend on the amount of debt issued, the number of shares bought back and the earnings of the company, among others. But, financing share buyback through debt would reduce the amount of equity and increase the amount of debt, which may result in over-leveraging and increase the company's risk.'

Related: What Is Debt Financing? (With Advantages And Disadvantages)

Investment Banking Internship Interview Questions And Answers

Most of the interview questions for investment banking internship are required to be preliminary ones. Some of them may also relate to your career choice and interest in investment banking. The following are some sample questions and how to answer them.

Why did you choose a career in investment banking?

This is a common question an interviewer asks to understand your interest in investment banking. You may talk about how this profession aligns with your long-term goals and how skills and qualities you possess can help you excel in this field.

Example: ‘I grew up in a family that values the habit of saving and investing money. Soon I realised that my good maths and analytical skills blended well with investment banking. That is when I decided to choose investment banking as a career. The very idea of managing a huge sum of money thrills me.'

Related: How To Become an Investment Banker: A Complete Guide

What is leveraged buyout?

The interviewer tries to test your basic vocabulary in investment banking. Explain the meaning of leverage and buyout while answering this question.

Example: ‘Leveraged buyout is when a company uses borrowed funds to acquire another company. The acquiring company often pledges the assets of the target company as collateral for obtaining loans.'

Related: 14 Highest-Paying Banking Jobs (With Salaries And Duties)

Why do companies issue debt when they can raise funds through equity?

Answer this question with several situations you can think of where issuing debt can be a better option than raising equity.

Example: ‘A company may prefer issuing debt over raising equity due to several reasons. For example, the interest paid on debt is deductible from taxable income. Since the company only pays interest and keeps the profits to itself, debt can provide higher return on investment. Sometimes, it may be relatively easier to issue debt than equity.'

Related: How to Write an Investment Banker Cover Letter (With Tips)

Investment Banking Interview Questions For Testers

Following are some questions for testing positions in investment banking:

  • What functions would you test in a stock trading application?

  • What is the difference between a market order and a limit order?

  • How do you test the database of an investment banking application?

  • Explain some potential security lapses of a stock trading application.

  • How do you improve the performance of an investment banking application?


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